Oxygen for strengthening Indo Pakistan diplomatic relations

Today, I received a message, “Two nuclear powers, one without Oxygen and other without vaccine”, the two countries referred to were India and Pakistan. For a second I was traumatized, but soon gathered the courage to write this blog.

I am of the opinion that Pakistan can play a role in saving the lives of Indians who are dying due to acute shortage of Oxygen. My suggestion is well supported by the efforts of employees of Pakistan Steel Mills, working to bring its Oxygen plant back into operations.

Luckily, Pakistan enjoys road as well as rail links and gas cylinders can be swiftly transported to India, within a very short span of time. India can complement the supply chain by sending empty cylinders to Pakistan.

In this endeavor the border forces/customs can also play their role by ‘clearing’ cylinders expeditiously, may be round the clock for a while. To reciprocate Pakistan’s good will gesture, India may also consider supplying COVID-19 vaccine to Pakistan.

Both the countries have lost hundreds and thousands of people due to COVID-19 and the near and dear will face the trauma for a long time to come. This must also brighten a fact that in case the two countries indulge in another war, with high probability of using atomic warheads, the death toll may run into millions.

Therefore, both the countries have to make concerted efforts to resolve all the long outstanding issues, including Kashmir. A huge percentage of population on both the sides on the border lives below the poverty line.

It goes without saying that both the countries enjoy potential to complement each other’s economy. Trading between the two countries is still going on through third country, which added to cost and extends transit time. India has already granted Pakistan ‘Most Favored Nation’ status and Pakistan has yet to reciprocate.

Though, the Government of Pakistan decided not to import cotton from India, but no word is the last word in politics, it can be reviewed. To ease the tension India can also reduce number of troops deployed in Indian Administered Kashmir.

Friendship between two countries flourishes, when their social and economic goals become common. In the prevailing circumstances, both India and Pakistan face a mammoth task of saving precious human lives. They can take the first step by exchanging Oxygen and vaccine.

Does change in MBS tone mean change of heart also?

Saudi Arabia’s de facto ruler, Mohammad bin Salman (MBS) has expressed desire to mend ties with Iran for the first time in years, but refrained from offering any goodwill gesture to build confidence between two rivals, Saudi Arabia and Iran. In a dramatic change in his views on Iran, MBS called for a ‘distinguished relationship’. 

“At the end of the day, Iran is a neighboring country. All we ask for is to have a good and distinguished relationship with Iran. We do not want the situation with Iran to be difficult. On the contrary, we want it to prosper and grow as we have Saudi interests in Iran, and they have Iranian interests in Saudi Arabia, which is to drive prosperity and growth in the region and the entire world,” the Saudi crown prince said in a recent televised interview.

He also expressed hope that his country would be able to overcome some challenges affecting Iranian-Saudi relations. “We really hope we would overcome them and build a good and positive relationship with Iran that would benefit all parties,” MBS pointed out. 

Public diplomacy between Iran and Saudi Arabia came after several Western media outlets reported that the two countries held direct talks in Baghdad in early April for the first time in at least five years. These talks are widely expected to continue in the coming weeks especially after Iranian Foreign Minister Mohammad Javad Zarif visited a number of regional countries ‑ Iraq, Qatar, Oman, and Kuwait ‑ enjoying good relations with Tehran and some of them with both Tehran and Riyadh. 

During his regional tour, Zarif once again presented the long-standing Iranian peace initiative Hormuz Peace Endeavor (HOPE), which is mainly intended to foster dialogue among regional states on security. 

Zarif’s tour raised speculations over a possible exchange of messages between Tehran and Riyadh. The Arab Weekly, a publication close to the United Arab Emirates, has put Zarif’s visits into a broader context of de-escalation between Iran and Saudi Arabia, implying that the tour is aimed at bridging the divide between long-standing rivals and launch a dialogue between them.

Regardless of the motivation behind Zarif’s visits, relations between Iran and Saudi Arabia seem to be experiencing a period of de-escalation of tension, at least for now. Whether this easing would continue for a long time or advance to a full-fledged restoration of diplomatic ties remains to be seen.

Saudis demonstrated little enthusiasm about mending ties with Iran beyond a change of tone that was more likely necessitated by the changing dynamics of the region’s politics after Joe Biden moved into the White House. The Saudi apparent flexibility came amid renewed US diplomatic efforts to put an end to the world’s worst humanitarian crisis in Yemen. 

Right from the start, Joe Biden made it clear to the Saudis that the days of full US support for their regional adventurism are over. He started his new Saudi policy by focusing more attention on the Yemen crisis, naming a special envoy for the war-torn country. He then announced that his administration would pursue diplomacy with Iran to revive the 2015 nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA), from which the Trump administration withdrew in May 2018.

Saudis first called on the United States to include them in the ongoing Vienna nuclear talks and expand the JCPOA in a way that encompasses other thorny issues such as Iran’s missile program and its regional influence. The US rejected the call to include the Saudis in the nuclear talks, while assuring them that these talks will not harm their interests. 

Facing a changing international environment, the Saudis seem to have decided to tone down their rhetoric against Iran and increase diplomatic contacts with the US and other Western powers. The diplomatic maneuver of MBS is not likely to heal the wounds Iranian-Saudi relations suffered in the past few years because this move is not driven by a genuine desire to change, but to realign him with the Biden administration.

Iranian presidential elections and fate of JCPOA negotiations

The next elections in Iran are scheduled for 18th June 2021. It is but obvious that the best efforts of President Rouhani’s team would be to get the sanctions imposed on the country removed and make a place for themselves in the history. He has stated that within the last 100 days of his presidency he would be able to get the sanctions lifted and relieve the economy.

As against this, the European countries, especially those not too keen in removing the sanctions may chose to slow down the process. Their choice would be to pressurize the newly elected regime to agree on revised terms and conditions.

The Vienna negotiations entered their third week on Tuesday 27th April 2021. Seyed Abbas Araghchi, Iran’s top negotiator, described the last meeting of the Joint Commission of the Joint Comprehensive Plan of Actions (JCPOA) ‘on the right track’.

 However, it is evident that a confrontation is going on. Iran, China and Russia unanimously and unequivocally called for the immediate lifting of the sanctions. Iran is patiently waiting for E3 (Germany, France and Britain) to call on the US to lift all the sanctions.

But that is unlikely to happen, as E3 has shown in the past that they have no free will of their own. Time and again, they have followed what the US has said.

The Biden administration is said to be looking into possibilities of easing banking, oil and finance sanctions on Iran. Immediate removal of all sanctions in a verifiable way is the only demand Iran has.

The JCPOA experience proves that when sanctions are lifted on paper, nothing practical is done. After the JCPOA, Iran kept struggling with issues such as transferring its money withheld in other countries. 

The Biden administration must understand that delaying tactics will not help. Leader of the Islamic Revolution is asking all sides not to engage in ‘erosive and prolonged’ negotiations, but expedite the process. Yet, the United States keeps saying that they do not want to rush into a deal. 

“We expect this to be a long process. And we're very much at just the beginning period,” Jen Psaki, the White House spokesperson, said on April 8.

The US seems to be insisting that the negotiations would take longer than expected. History suggests that the US is likely to wait and see what happens in the elections, as they reportedly did in 2013, when John Kerry halted the negotiations. 

There are many details that need to be ironed out. For example, the sanctions on the Islamic Revolutionary Guard Corps (IRGC), along with the sanctions on the office of Ayatollah Khamenei, Leader of the Islamic Revolution, need to be resolved. According to the Wall Street Journal, there is a big difference of opinion about the removal of sanctions on these two sides.

As regards stance of potential presidential candidates, they have announced their plans for the continuation of negotiations, if elected.

Rostam Ghasemi, former Minister of Petroleum during Mahmoud Ahmadinejad’s administration and a presidential candidate, stated that sanctions removal is his first priority, and he will take the control of the negotiations himself if elected. 

Making the sanctions ineffective is his next priority. “If I want to negotiate, I will strengthen the country’s economy,” Ghasemi said.

“We should change the ‘imploring diplomacy’ to the diplomacy of power,” he said on his possible government’s diplomacy.

He added that the United States “must return to the JCPOA without any preconditions.”

Saeed Jalili, another potential and highly anticipated presidential candidate, is expected to continue the negotiations if elected. Based on his past experience as the Secretary General of Iran’s Supreme National Security Council, and him being Iran’s Chief Nuclear Negotiator between 2010 and 2013, it is likely that he would continue the negotiations. 

Saeed Mohammad, the former Director of Khatam-al -Anbiya Construction Headquarters and a mysterious figure to many Iranians, has officially announced that he is running for president.

He has also declared that he is open to negotiations, on the condition that Iran “strengthens itself internally.” 

Saudis and Israelis don’t approve JCPOA talks

According to media reports, with Iran and world powers resumed nuclear talks, Saudi Arab and Israel also intensified consultations. Washington and Tel Aviv on the one hand and Washington and the Persian Gulf Cooperation Council on the other hand are having extensive talks. 

Both, Israel and Saudi Arabia wants to influence any US move to return to the 2015 Iran nuclear deal, which they have publicly opposed right from the beginning.

As the Iranian negotiating team head to the Austrian capital of Vienna, a senior Israeli delegation comprising of Mossad Chief Yosef Cohen, Head of Military Intelligence Tamir Hayman, and National Security Adviser Meir Ben-Shabbat also arrived in Washington for talks. Chief of Staff of the Israeli Army Aviv Kochavi was also supposed to join the delegation but the recent hike in Israel-Gaza tensions forced him to cancel his trip to Washington.

The visiting delegation met with several high-level Biden officials including National Security Adviser Jake Sullivan, Chairman of the Joint Chiefs of Staff Mark Milley and senior US military and intelligence officials. The focus of the conversations is squarely on the terms of the US return to the 2015 nuclear deal. 

Sullivan and Ben-Shabbat held their first in-person meeting since Joe Biden entered the White House. The US and Israeli officials discussed their serious concerns about advancements in Iran’s nuclear program in recent years. The United States updated Israel on the talks in Vienna and emphasized strong US interest in consulting closely with Israel on the nuclear issue going forward. The US and Israel agreed on the significant threat posed by Iran’s aggressive behavior in the region.

Following the meeting of Sullivan and Ben-Shabbat, the White House said the US and Israel agreed to establish a new group to counter Iran’s drones and missiles.

The United States and Israel agreed to establish an inter-agency working group to focus particular attention on the growing threat of Unmanned Aerial Vehicles and Precision Guided Missiles produced by Iran, claiming that these weapons are being provided to proxy groups in the West Asia region. 

Also US Special Envoy for Iran Robert Malley held talks with Saudi Foreign Minister Prince Faisal bin Farhan alongside officials from the countries of the Persian Gulf Cooperation Council (GCC). Malley said he discussed the Arab officials the situation around the JCPOA and the Vienna nuclear talks. 

The US discussions with Saudi Arabia aim to persuade them the US return to the 2015 nuclear deal will not harm their own interests. But this is exactly what the Obama administration told the Saudis and the Israelis after signing the JCPOA in 2015. Instead of supporting the deal, the Saudis and Israelis joined forces to kill the deal and the Trump came into power, they saw a new opportunity to scrub the deal. They may have even thought that the JCPOA would never be revived given the blows the Trump administration delivered to it. This may explain why they are so anxious about the JCPOA being revived after four years of anti-JCPOA rhetoric from Washington. 

If the Biden administration is really keen to revive the JCPOA, it needs to be aware of any possible unconstructive efforts on the part of the Saudis and Israelis because they have never been proponents of the deal and they are unlikely to change their mind just because there is a new president in the White House. Of course, they may stop short of calling on the Biden administration to refrain from rejoining the JCPOA but they will certainly ask the U.S. to at least make some amendments to the original deal, something that will be opposed by other signatories to the JCPOA namely Russia and Iran. 

Mikhail Ulyanov, Russia’s permanent representative to international organizations in Vienna, has recently said that the negotiators in Vienna have come to conclude that regional security and missile production are different from curbing Iran’s nuclear program.

Curbing Iran's nuclear program is a different matter from regional security and missile production. At the end of two rounds of talks in Vienna to revive the JCPOA, it was clear to all participants that only by reviving the original agreement could achieve the goals. No new terms or clauses needs to be added. Iran has strongly rejected any attempt to expand the JCPOA, while calling on the US to remove its sanctions. 

Who will control Chabahar? India or China

Early this month, I had posted a blog “India to begin full-scale operations at Iranian port Chabahar in May 2021”. I had stated, “Indian US$500 million investment represents a clear and potent commercial challenge to China’s massive port investment in Gwadar port located in Pakistan, a key component of Beijing’s Belt and Road Initiative (BRI).” 

Today, I am posting excerpts from an interview of Behrouz Aghaei, Director General, Ports and Maritime Department, Sistan-Baluchestan province of Iran.

Following are the key takeaways:

Iran calls Chabahar port the “Gate of Nations” and that is an indication of its view about this port’s future. Chabahar is going to be one of the top trade hubs in the region, linking the West Asian nations to CIS countries.

Not only China, but any other country that is willing to invest in Chabahar is welcomed by Iran provided that the economic independence of the port and the interests of the Islamic Republic are ensured.

Being Iran's only oceanic port on the Gulf of Oman, Chabahar holds great significance for the country both politically and economically. Iran has taken serious measures for developing this port in order to improve its maritime trade.

The first and most important issue that the Ports and Maritime Organization (PMO) has taken into account when considering investment offers by foreign trade partners, is the port’s economic independence.

India currently works with Iran as an operator in this port and the country does not have an exclusive right over any part of this port.

Iran welcomes other countries to come and participate in the development of this port beside India.

Iran has been welcoming investors from all over the world to take part in the development of this port and benefit from its distinguished position as a trade hub in the region.

The recent agreement between Iran and China has increased the chances of this giant economy participating in the development of this port and to further contribute to the improvement of its global status.

China’s contribution to the development of Chabahar port would be a great opportunity for this port to further establish itself as a trade hub in the region since China is currently one of the world’s most advanced countries in terms of maritime and port industries.

Three of the world’s top shipping companies and operators are Chinese companies, for instance, COSCO is currently the world’s fourth-biggest shipping line which is operating at 45 ports worldwide.

China's entrance into Chabahar port could lead to significant growth in this port because shipping lines and operators play a key role in the development of a port.

The activity of Chinese shipping lines in Chabahar port could increase the port’s trade exchanges with the world to a very significant level.

China is currently having maritime trade exchanges with over 162 countries worldwide and the activity of Chinese renowned shipping lines in Chabahar port would mean linking of the port to more than 45 ports and over 162 countries.

China plays a key role in the development of container ports around the world. Six of the world’s top 10 container ports are in China which means about 60% of the world’s container operations are taking place in this Asian country.

Research shows that the Chinese ports are going to register the world’s largest growth in terms of container trade by 2024.

Mari Petroleum offers enormous upside potential

Mari Petroleum (MARI), a leading exploration and production company of Pakistan offers an upside potential on the expectation of dividend payout after the removal of cap by the government. 

Other contributing factors are: 1) stable and growing volumetric sales from Mari Habib Rahi Limestone (HRL) field, 2) likely entry into other possible energy/gas chain projects, 3) healthy cash generation as it is least affected by circular debt and 4) favorable shift in gas pricing.

Stable and growing volumetric sales: 

Gas production from Mari field has grown at a 5-Y CAGR (FY16-FY21) of 3% compared to annual natural decline rate of 5-6% of a gas field. This growth is attributed to continuous efforts to keep production above the threshold of 577.5 mmcfd (+10% of 525 mmcfd) by drilling more development wells and adapting various production enhancement techniques like acid simulation, debottlenecking activities, compression installation amongst others.

Removal of cap on dividends: 

The government has removed cap on dividend payout of the company in wake of likely divestment to attract a better price. Analysts consider this as a positive development as high cash generation capability (12% of market cap every year) of the company can attract more strategic investors. The Company is expected to maintain payout ratio of 60%, translating into decent D/Y of 8-11% in next four years.

Likely entry into other energy chain projects: 

The company is taking service of renowned consultancy firm Mckinesy and other energy sector consultants to evaluate and consider projects like offshore blocks, acquisition of international blocks, setting up LNG terminal, gas power plant, expanding into fertilizer business, renewable power plants and petrochemical plant. It is believed that capital will not be a constraint for the company for projects like petrochemical and fertilizer due to healthy existing cash balance and recurring cash generation.

Healthy cash generation: 

Over the last two years (FY19 and FY20), the Company has accumulated a cash balance of Rs35 billion due to healthy operating cash flows thanks to rising profits and lower link with circular debt. This has increased book value of the company to Rs822/share as of December 2020, from Rs302 as of June 2018), translating into net cash of Rs446/share.

Favorable shift in gas pricing:

In FY20, the Company had recorded 35% of its revenue from fields (including incentive) based on PP2012 policy. Pricing based on PP2012 policy is 3x higher than the prevailing 2001 pricing policy (50% of 2001) of the Company. In FY17, revenue based on PP2012 used to be 5-10% of total revenue.

CAGR: 

Analysts expect MARI to post 3-Year earnings CAGR of 10% on the back of 2.2% per annum growth in gas sales, PKR depreciation of 5-6% per year, and 1.9% per annum growth in oil prices assumption.

Valuation: 

Analysts have used reserves based discounted cash flow methodology to arrive at December 2021 Target Price of Rs2,103, providing a total return of 41% (including D/Y of 9%). The Company is currently trading at FY22E PE, EV/Reserve (boe) and EV/EBITDA of 5.5x, US$1.4 and 2.9x, respectively.

Key risks:

The key risks include: 1) The Company’s inability to complete debottlenecking and other production enhancement projects on time, 2) lower than expected oil prices, 3) change in pricing regulations and 4) PKR appreciation.

Pakistan awards exploration blocks to state-run Exploration & Production companies

Reportedly, the Government of Pakistan has awarded six petroleum exploration blocks in Sindh, Baluchistan and Punjab to state-run oil and gas exploration and production companies.

The exploration licences (ELs) and petroleum concession agreements (PCAs) were signed by Petroleum Secretary and Director General of Petroleum Concessions on behalf of the GoP and Managing Directors of Oil and Gas Development Company (OGDCL), Mari Petroleum Company (MPCL) and Pakistan Petroleum at a ceremony witnessed by newly appointed Minister for Energy.

These included Block No. 3068-6 (Killa Saifullah) and Block No. 3067-7 (Sharan) in Baluchistan with OGDCL and MPCL; Block No. 3069-9 (Suleiman-Balochistan) with OGDCL and PPL; and Block No. 2467-17 (Sujawal South) in Sindh, Block No. 3273-5 (Jhelum) and Block No. 3272-16 (Lilla) with OGDCL.

Director General, Petroleum Conces­sion reported that minimum firm work commitment for these blocks was US$24.68 million for a period of three years. The companies are obligated to spend a minimum of US$30,000 per year in each block on social welfare schemes. Annual social welfare obligation in respect of these six blocks is US$180,000.

The Killa Saifullah block covering an area of 2421.96 sq-km is located in Killa Saifullah district, while the Sharan block covering an area of 2497.89 sq-km is situated in Killa Saifullah and Zhob districts. The Suleiman block covering an area of 2172.89 sq-km is located in Musakhel, Zhob, Killa Saifullah and Loralai districts. The Sujawal South block covering an area of 1914.1 sq-km is located in Sujawal district of Sindh. The Jhelum block covering an area of 1524.65 sq-km is located in districts of Jhelum, Gujrat and Mandi Bahauddin, while the Lilla block covering an area of 2361.12 sq-km is situated in Chakwal, Jhelum and Khushab districts.

OGDCL is a public limited company engaged in exploration and production (E&P) activities in the country for the last four decades. The Company holds the largest share of 41% in oil and 36% in gas out the total reserves in the country. Its percentage share of total oil and gas production in Pakistan is 47% and 29%, respectively. OGDCL is the operator of 41 exploration licences and working interest owner in six other exploration blocks operated by various E&P companies. OGDCL is currently produces 35,805 barrel oil per day (bopd) oil, 1,012 million cubic feet per day (mmcfd) gas, 761 tons LPG and 53 tons of sulphur per day.

PPL is also a public limited company engaged in exploration and production activities in the country. It is Pakistan’s oldest and largest E&P Company incorporated in 1950. Its percentage share of total oil and gas production in Pakistan is 13% and 19%, respectively. PPL is the operator in 26 exploration licences and working interest owner in 17 other exploration blocks operated by various E&P companies. PPL currently produces 10,076 bopd Oil, 673mmcfd gas and 238 million tons LPG.

Mari Petroleum is an integrated exploration and production company currently managing and operating Pakistan’s largest gas reservoir at Mari gas field in Daharki, Sindh. MPCL is the second largest gas producer in the country with 753mmcfd gas and 1,722bopd oil. MPCL is the operator in six development and production leases, 11 exploration licences and working interest owner in seven other exploration blocks operated by various E&P companies.

The Energy Minister expressed the hope that licences would benefit the country in the form of additional hydrocarbon reserves over the next few years. He said the execution of ELs and PCAs would not only enhance investment in the petroleum sector but also contribute to bridging the gap between demand and supply of energy in the country.